HSBC ASSET MANAGEMENT (INDIA) P. LATD, MUMBAI V. DDIT (IT)3(1), MUMBAI

ITA 2028/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49131 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 08-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 01-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASHI
• Keywords: Depreciation
• Section: 143(3); 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.2028/MUM/2009(A.Y. 2004-05) M/S. HSBC ASSET MANAGEMENT (INDIA) PRIVATE LIMITED, D.N.ROAD, MUMBAI 01. PAN:AABCH 0007N (APPELLANT) VS. THE DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 3(1), MUMBAI. (RESPONDENT0 APPELLANT BY : SHRI YOGESH THAR RESPONDENT BY : SHRI V.V.SHASHI ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESEE AGAINST THE ORDER DATED 22/1/2009 OF CIT(A)XXXIII, MUMBAI RELATING TO ASSESSMENT YEAR 20 04-05. 2. THE ASSESSEE IS A COMPANY. IT ACTS AS INVESTMEN T MANAGER OF HSBC MUTUAL FUNDS. THE SEBI HAS APPROVED THE ASSESSEE T O ACT AS INVESTMENT MANAGER OF MUTUAL FUNDS. THE ASSESSEE RECEIVED CER TIFICATE OF REGISTRATION TO ACT AS PORTFOLIO MANAGER UNDER THE SEBI(PORTFOLIO M ANAGERS) REGULATIONS 1993 W.E.F. 16/9/05. 3. ON PERUSAL OF DEPRECIATION CHART FILED AS ANNEX URE TO TAX AUDIT REPORT IN FORM NO.3CD, THE AO NOTICED THAT THE ASSESSEE HAD C LAIMED DEPRECIATION ON INTANGIBLE ASSETS @ 25%. IT WAS FURTHER STATED BY WAY OF NOTE THAT, THE INTANGIBLE ASSETS COMPRISED OF PRE-OPERATIVE EXPENS ES OF RS. 77,58,599/- AND SEBI REGISTRATION FEE OF RS. 25,00,000/-. ACCO RDING TO THE ASSESSEE, THE EXPENDITURE INCURRED IN SECURING REGISTRATION FROM SEBI BY PAYING ITA NO.2028/MUM/2009(A.Y. 2004-05) 2 REGISTRATION FEE OF RS.25,00,000/- WAS AN INTANGIBL E ASSET ON WHICH THE ASSESSEE CAN CLAIM DEPRECIATION U/S.32(1)(II) OF TH E ACT. FURTHER THE EXPENDITURE INCURRED PRIOR TO OBTAINING REGISTRATIO N TO ACT AS MUTUAL FUND MANAGER OF RS. 77,58,599/- REQUIRED TO BE CAPITALIZ ED AND TREATED AS INTANGIBLE ASSET AND THE ASSESSEE WAS ENTITLED TO C LAIM DEPRECIATION U/S.32(1)(II) OF THE ACT. ACCORDING TO THE AO, PRE -OPERATIVE EXPENSES AND SEBI REGISTRATION FEE DOES NOT SPECIFICALLY FALL U/ S. 32(1)(II) OF THE INCOME TAX ACT, 1961 (THE ACT) AS INTANGIBLE ASSET AND THEREFO RE HE CALLED UPON THE ASSESSEE TO JUSTIFY ITS CLAIM FOR DEPRECIATION ON I NTANGIBLES. IN RESPONSE THE ASSESSEE VIDE LETTER DATED 13/12/2006 SUBMITTED THE BREAKUP OF THE PRE- OPERATIVE EXPENSES INCURRED BY THE ASSESSEE DURING ASSESSMENT YEAR 2002- 03 (I.E. RELEVANT TO PREVIOUS YEAR ENDED MARCH, 31, 2002, PRIOR TO COMMENCEMENT OF BUSINESS BY THE ASSESSEE AS FOLLOWS : S.NO. PARTICULARS AMOUNT AMOUNT 1. RENT & UTILITIES 9,37,003 2. COMPENSATION & BENEFITS 44,20,975 - SALARY & ALLOWANCES - CONTRACTUAL BENEFITS - PENSION FUND CONTRIBUTION - PROVIDENT FUND CONTRIBUTION - RECRUITMENT COST - SITTING FEES DIRECTOR -SITTING FEES- TRUSTEE 38,90,609 40,085 1,88,219 2,03,419 21,143 25,000 52,500 3. GENERAL & ADMINISTRATIVE EXPENSES 24,00,621 4. SEBI REGISTRATION FEES 25,00,000 TOTAL EXPENDITURE INCURRED BEFORE COMMENCEMENT OF BUSINESS. ON APRIL 2,2002 1,02,58,599 ========== LESS: DEPRECIATION CLAIMED @ 25% FOR ASSESSMENT YEAR 2003-04 (RELEVANT TO PREVIOUS YEAR ENDED MARCHG, 2003) (-)25,64,650 WDV AS ON APRIL 1, 2003 76,93,949 LESS: DEPRECIATION CLAIMED @ 25% FOR ASSESSMENT YEAR 2004-05 (RELEVANT TO PREVIOUS YEAR ENDED MARCH 31,2004) (-)19,23,487 WDV AS ON APRIL 1, 2004 57,70,462 THE ASSESSEE POINTED OUT TO THE AO THAT IT HAD COMM ENCED ITS BUSINESS ON APRIL 2, 2002 AND THAT THE ABOVE MENTIONED EXPENSES WERE INCURRED PRIOR TO COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE. IT W AS FURTHER CLARIFIED THAT ITA NO.2028/MUM/2009(A.Y. 2004-05) 3 THE ASSESSEE WAS A COMPANY INCORPORATED AS A PRIVAT E COMPANY WITH THE MAIN OBJECT OF CARRYING ON THE BUSINESS OF ASSET M ANAGEMENT COMPANY. THE SUM OF RS. 25,00,000 WHICH IS THE REGISTRATION FEE PAID TO SEBI UNDER REGULATION 9 OF THE SEBI (MUTUAL FUND) REGULATIONS, 1996 TO OBTAIN REGISTRATION AS N ASSET MANAGEMENT COMPANY, WHICH I S MANDATORY TO COMMENCE ITS BUSINESS. THE REGISTRATION FEES PAID BY THE ASSESSEE COMPANY IS A ONE TIME REGISTRATION FEES. A COPY OF THE REG ISTRATION CERTIFICATE FROM SEBI WAS ALSO FILED. IT WAS SUBMITTED BY THE ASSESS EE THAT THE REGISTRATION FEE IS A PAYMENT MADE TO OBTAIN A COMMERCIAL RIGHT WITHOUT WHICH THE ASSESSEE COULD NOT HAVE COMMENCED ITS BUSINESS AS A N ASSET MANAGEMENT COMPANY. IT WAS FURTHER SUBMITTED THAT THE OTHER E XPENSES LIKE RENT AND UTILITIES, SALARIES, ADMINISTRATION, ETC. WERE INCU RRED SO AS TO ENABLE THE ASSESSEE TO GET THE REQUIRED REGISTRATION UNDER REG ULATION 9 STATED ABOVE. IT WAS SUBMITTED THAT THE OTHER EXPENSES INCURRED WERE ALSO TO OBTAIN A COMMERCIAL RIGHT (VIZ. REGISTRATION FROM SEBI) WIT HOUT WHICH THE BUSINESS OF THE ASSESSEE CANNOT BE CARRIED ON. IT WAS ARGUE D THAT THE RIGHT OBTAINED ON REGISTRATION WITH SEBI IS SIMILAR TO THE RIGHT O BTAINED BY A MEMBER OF A RECOGNIZED STOCK EXCHANGE ON OBTAINING MEMBERSHIP O F THE STOCK EXCHANGE. THE SAME PRINCIPLE CAN BE APPLIED TO REGISTRATION R EQUIRED BY THE ASSESSEE COMPANY TO CARRY ON THE BUSINESS OF AN ASSET MANAGE MENT COMPANY. THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS IN WHICH IT WAS HELD THAT THE MEMBERSHIP OF A RECOGNIZED STOCK EXCHANGE IS IN NAT URE OF COMMERCIAL RIGHT, AND IS AN INTANGIBLE ASSET ON WHICH DEPRECIATION U/S. 32 IS ALLOWABLE VIZ., A) TECHNO SHARES AND STOCK LIMITED VS. ITO (101 TTJ 349)(BOM); M/S. KAYNET CAPITAL LTD. VS. DCIT (ITA NO.3870/M/05)(MUM ) 4. THE AO HOWEVER WAS OF THE VIEW THAT AN AMOUNT OF RS. 77,58,599/- WAS INCURRED PRIOR TO THE COMMENCEMENT OF BUSINESS MAINLY ON ACCOUNT OF RENT & UTILITIES, SALARIES, ADMINISTRATION, ETC. A CCORDING TO THE AO, THE ITA NO.2028/MUM/2009(A.Y. 2004-05) 4 INTANGIBLE ASSET CONTEMPLATED BY SECTION 32(1)(II) SHOULD BE IN THE NATURE OF KNOW-HOW, PATENT, COPYRIGHTS, TRADE MARKS, LICENCES , COMMERCIAL RIGHTS ETC. AND THE SAME SHOULD HAVE BEEN ACQUIRED BY THE ASS ESSEE ON OR AFTER 1/4/1998. ACCORDING TO THE AO BY NO STRETCH OF IMAG INATION CAN THE EXPENSES LIKE RENT & UTILITIES, SALARIES, ADMINISTR ATION, ETC. BE CONSIDERED INTANGIBLE ASSET NOR CAN IT BE SAID THAT THE ASSESS EE ACQUIRED ANY INTANGIBLE ASSET. ACCORDINGLY, THE DEPRECIATION CLAIMED BY TH E ASSESSEE ON PRE- OPERATIVE EXPENSES WERE DISALLOWED. FOR IDENTICAL REASONS THE AO HELD THAT DEPRECIATION ON REGISTRATION FEE TREATING IT AS INT ANGIBLE ASSET CANNOT ALSO BE ALLOWED. 5. BEFORE CIT(A) THE ASSESSEE APART FROM REITERATIN G ITS STAND AS WAS MADE BEFORE THE A.O., SUBMITTED THAT IN A.Y 2003-0 4 THE ASSESSEE HAD CLAIMED DEPRECIATION ON FEES PAID TO SEBI FOR REGIS TRATION OF RS. 25,00,000/- AND ALSO THE PRE-OPERATIVE EXPENSES BY TREATING THE M AS PART OF THE ACTUAL COST OF THE BLOCK OF INTANGIBLE ASSETS AND THE AO H AD ALLOWED DEPRECIATION IN THE SAID ASSESSMENT YEAR IN THE ORDER PASSED UNDER SECTION 143(3) OF THE ACT. IT WAS SUBMITTED THAT IN THE PRESENT ASSESSMENT YEA R IT WAS NOT POSSIBLE TO DISALLOW DEPRECIATION ON ITEM OF ASSET WHICH HAS AL READY IN THE BLOCK OF ASSETS AND IN RESPECT OF WHICH DEPRECIATION HAD ALR EADY BEEN ALLOWED. THIS SUBMISSION OF THE ASSESSEE WAS NOT CONSIDERED BY TH E CIT(A). THE CIT(A) CONFIRMED THE ORDER OF THE AO HOLDING THAT THERE W ERE NO INTANGIBLE ASSETS ON WHICH DEPRECIATION CAN BE ALLOWED. 6. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSE E HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. THOUGH THE ASSESSEE HAS RAISED MANY GROUNDS OF A PPEAL, IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HAT THE ASSESSEE WOULD ITA NO.2028/MUM/2009(A.Y. 2004-05) 5 PRESS FOR ADJUDICATION ONLY THE GROUND RAISED BY TH E ASSESSEE BEFORE THE TRIBUNAL THAT DEPRECIATION SHOULD BE ALLOWED TREAT ING THE SEBI REGISTRATION FEE AS INTANGIBLE ASSET OR IN THE ALTERNATIVE THE SAME SHOULD BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. FURTHER IT WAS SUBMITTED THAT THE PRE-OPERATIVE EXPENSES INCURRED IN CONNECTION WITH OBTAINING REGISTRATION OF THE MUTUAL FUND FROM SEBI SHOULD BE CAPITALIZED AN D TREATED AS PART OF THE BLOCK OF ASSETS INTANGIBLE ASSETS AND DEPRECIATIO N ALLOWED ON THE SAME. THE LEARNED D.R. RELIED ON THE ORDER OF THE REVENUE AUTHORITIES. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS SEEN FROM PAGE NO.63 OF THE ASSESSEES PAPER BOOK THAT IN A.Y 2003-04 THE ASSES SEE HAD CLAIMED DEPRECIATION OF RS. 25,64,650/- AS ALLOWABLE AS PER THE PROVISIONS OF THE IT ACT ON BLOCK OF ASSETS UNDER THE HEAD INTANGIBLE A SSETS. THE AO ALLOWED THE CLAIM OF THE ASSESSEE OF DEPRECIATION FOR A.Y 2 003-04 BY AN ORDER PASSED UNDER SECTION 143(3) DATED 28/3/2006. THUS IT IS C LEAR THAT THE FEES PAID FOR REGISTRATION AS A MUTUAL FUND TO SEBI AND THE PRE-O PERATIVE EXPENSES PRIOR TO SUCH REGISTRATION HAVE ALREADY BEEN TREATED AS I NTANGIBLE ASSET AND FORM PART OF THE BLOCK OF ASSETS OF THE ASSESSEE AS ON 1 /4/2004. THE PROVISIONS OF SEC.32 (1) (II) OF THE ACT PROVIDES AS FOLLOWS: 32. DEPRECIATION.--(1) IN RESPECT OF DEPRECIATION OF-- (I) BUILDINGS, MACHINERY, PLANT OR FURNITURE BEING TANGIBLE ASSETS; (II) KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LI CENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGH TS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTE R THE 1ST DAY OF APRIL, 1998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED F OR THE PURPOSES OF THE BUSINESS OR PROFESSION THE FOLLOWIN G DEDUCTIONS SHALL BE ALLOWED-- ITA NO.2028/MUM/2009(A.Y. 2004-05) 6 (I) IN THE CASE OF ASSETS OF AN UNDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTION OF POWER, SUCH PERCE NTAGE ON THE ACTUAL COST THEREOF TO THE ASSESSEE AS MAY BE PRESC RIBED. (II) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERCE NTAGE ON THE WRITTEN DOWN VALUE THEREOF AS MAY BE PRESCRIBED: PROVIDED THAT.. EXPLANATION 2.--FOR THE PURPOSES OF THIS SUB-SECTIO N 'WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS' SHALL HAVE THE S AME MEANING AS IN CLAUSE (C) OF SUB-SECTION (6) OF SECTION 43; EXPLANATION 3.--FOR THE PURPOSES OF THIS SUB-SECTIO N, THE EXPRESSIONS 'ASSETS' AND 'BLOCK OF ASSETS' SHALL ME AN-- (A) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PL ANT OR FURNITURE ; (B) INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COP YRIGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS O R COMMERCIAL RIGHTS OF SIMILAR NATURE. SEC.43(6)( C) OF THE ACT DEFINES WRITTEN DOWN VALUE AND IT READS AS FOLLOWS: 43. DEFINITIONS OF CERTAIN TERMS RELEVANT TO INCOM E FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION.--IN SECTION 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES (6) 'WRITTEN DOWN VALUE' MEANS-- (A) (B) (C) IN THE CASE OF ANY BLOCK OF ASSETS,-- (I) (II) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO TH E ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1989, THE WRITTEN DOWN VALUE OF THAT BLOCK O F ASSETS IN THE IMMEDIATELY PRECEDING PREVIOUS YEAR AS REDUC ED BY THE DEPRECIATION ACTUALLY ALLOWED IN RESPECT OF THA T BLOCK OF ASSETS IN RELATION TO THE SAID PRECEDING PREVIOU S YEAR AND AS FURTHER ADJUSTED BY THE INCREASE OR THE REDU CTION REFERRED TO IN ITEM (I). IN OTHER WORDS IN TERMS OF SECTION 32(1)(II) OF THE ACT, THE AO HAS TO ALLOW DEPRECIATION ON THE WDV OF THE BLOCK OF ASSETS AND THE PRESCRIBED RATES. THE AO CANNOT IN THE PRESENT ASSESSMENT YEAR DISPUT E THE OPENING WDV OF THE BLOCK OF ASSETS NOR CAN HE EXAMINE THE CORRECTN ESS OR OTHERWISE OF THE OPENING WDV BROUGHT FORWARD FROM THE EARLIER YEAR. IT WAS ALSO SUBMITTED ITA NO.2028/MUM/2009(A.Y. 2004-05) 7 BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ORDER UNDER SECTION 143(3) FOR A.Y 2003-04 CONTINUES TO EXIST AND HAS NOT BEEN DIS TURBED BY ANY PROCEEDINGS UNDER THE ACT. WE ARE THEREFORE, OF TH E VIEW THAT IT WAS NOT POSSIBLE FOR THE AO IN THE PRESENT ASSESSMENT YEAR TO TAKE A STAND DIFFERENT FROM THE ONE TAKEN IN THE EARLIER ASSESSMENT YEAR. HAVING ALLOWED THE DEPRECIATION IN THE IMMEDIATELY PRECEDING YEAR IT I S NOT OPEN TO THE AO TO TAKE DIFFERENT STAND FOR THE YEAR UNDER CONSIDERATI ON. ON THIS SHORT GROUND, WE DIRECT THAT THE DEPRECIATION CLAIMED BY THE ASSE SSEE SHOULD BE ALLOWED. IN VIEW OF THE ABOVE, WE HAVE NOT GONE INTO THE QUE STION WHETHER THE SUMS IN QUESTION WOULD BE TERMS AS INTANGIBLE ASSETS ENTITL ED TO DEPRECIATION. FOR THE REASONS GIVEN ABOVE WE ALLOW THE APPEAL OF THE ASSESSEE. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 15 TH DAY OF JUNE, 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 15 TH JUNE.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RH BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.2028/MUM/2009(A.Y. 2004-05) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 8/6/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 9/6/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER